How are gifts to Hindu Undivided Family taxed? Key rules every taxpayer should know

Tax rules around gifts to a Hindu Undivided Family (HUF) can often be confusing, especially when it comes to limits, exemptions and clubbing provisions. Here’s a clear explanation of how gifts to an HUF are taxed and whether they can be treated as capital.

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I understand that a Karta or any coparcener/member of a Hindu Undivided Family (HUF) can make gifts to the HUF without any monetary limit and without any tax liability for the HUF, although clubbing provisions will apply. I also understand that gifts received by the HUF from non-relatives in excess of Rs 50,000 in a financial year are treated as income and become taxable. Can the HUF accept such amounts as capital instead of gifts to avoid tax implications?

Expert advice: Gifts are taxed in the hands of the recipient if the aggregate value of all gifts received from all sources during a financial year exceeds Rs 50,000. However, this general rule has certain exceptions. Gifts received from specified relatives are not treated as income. All members of an HUF fall under the definition of “specified relatives” in relation to the HUF. Therefore, any member of the HUF can make a gift of any amount to the HUF without attracting tax, and there are no tax implications for either the HUF or the member making the gift at the time of the transfer.

However, the income that accrues to the HUF from the amount gifted by a member is subject to clubbing provisions under Indian tax laws. Such income will be clubbed with the income of the member who made the gift.

The threshold limit of Rs 50,000 applies only to gifts received by the HUF from non-specified relatives during a financial year. If the total value of such gifts exceeds Rs 50,000, then the entire amount becomes taxable in the hands of the HUF.

The question of treating such a contribution as “capital” does not arise, as an HUF is not a partnership firm where partners contribute capital. However, funds can be given to the HUF as a loan instead of a gift. In that case, interest should ideally be charged at a reasonable market rate. If no interest is charged, any income arising from the funds given may still be subject to clubbing under Section 60 of the Income Tax Act.

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